Current issues in economics

Tag Archives: Energy

The impact of energy flows on the power and influence of nations has mostly been about the need for oil. Securing oil supply by ensuring its shipment, protecting the countries that produce it to the extent of going to war in an oil producing country has been prevalent in the 20th century. Oil being inelastic in demand has meant that as it becomes more scarce the price increases will result in higher revenue for the oil producing oligopoly. Countries dependent on the importing of oil have been at the wrath of higher oil prices caused by embargoes, wars, a financial crisis to name but a few – see graph below.

In fact the USA has been the most aggressive in protecting its oil supply to the extent that it saw it as their right to use military force in the Middle East – 2003 – second Iraq War. The reason given was to remove Saddam Hussein but this just disguised their real motive was to protect the oil fields. If they were so concerned about Saddam Hussein’s regime why didn’t they do anything about Robert Mugabe in Zimbabwe? The answer is Zimbabwe doesn’t have oil. Remember the Gulf War in 1990 was a UN sanctioned operation involving many countries not just the USA and UK.

However the idea of scarcity is coming to an end thanks to 3 big developments.

The shale revolution in the US has lead to them being the biggest combined producer of oil and gas – the US now pumps 10m barrels a day and it is making the country less reliant on imported oil. Also increases in US supply has added to the global market reducing the price.

China is now moving to a more service based economy and in the process is moderating its demand for coal and oil, slowing the consumption of electricity. More importantly though it is deploying gas and renewable energies and stopping the growth of carbon-dioxide emissions. It’s dependence on imported fossils fuels has been the catalyst to develop more of its own wind and sunlight for energy sources as well as it planner more electric vehicles.

Climate change requires low-carbon energy and the Paris accord of 2015 is a start to fight climate change. To achieve this goal trillions of dollars will have to be invested in wind and solar energy, batteries, electricity grids and a range of more experimental clean-energy sources. Ultimately this creates significant competition between countries in developing these technologies but also but at risk the access to rare earths and minerals to make the hardware. It seems that energy is now driven by the technology not the natural resource we are so used to.

Energy transitions since the Industrial Revolution has seen the following:

Coal ——> oil ——> technology and clean energy.

The obvious losers from this change will be those who have an endowment of fossil-fuel reserves and have relied for too long on oil without reforming their economies.

Traditional energy system (oil etc) is constrained by scarcity
The abundant renewable energy system is contained by variability

Ultimately the challenge for countries in future will be who can produce the most energy and who has the best technology. Those that don’t embrace clean-energy transition will be losers in the future.

Source: The Economist – Special Report ‘The Geopolitics of Energy’ 17th March 2018

Over the last year oil prices have fallen by 55% with the price of a barrel of oil around the US$48 – see graph. China is the world’s second largest oil consumer (behind the United States) and largest net importer and is set to benefit from lower oil prices as consumers have more disposable income. Firms can also take advantage by reducing costs and boosting profits.

Since 1995 China’s oil consumption has been driven by the country’s rapid rate of growth especially in the manufacturing sector. By 2002 China had overtaken Japan as the second largest oil consumer. However oil’s share of China’s primary energy consumption has declined since this time – from 23% in 2002 to 18% in 2013 – as other energy sources have grown more rapidly. For most developed economies oil makes up approximately 37% of energy needs. China is still quite reliant on coal for around 70% of the country’s energy needs – see graph.

Last year China imported oil to the value of US$228bn which equates to 19% of total imports and 2.5% of GDP. With the lower oil prices there will be a reduction in money leaving the Chinese economy which should boost more domestic consumption.

According to the International Energy Agency (IEA) coal accounts for 20% of the primary energy supply in OECD countries. If you consider world consumption, coal accounts for 50% of the increase in energy use between 2000-2010. Not surprisingly 66% of the growth in demand for energy has come from Asia with China leading the world in coal production and consumption – some interesting facts:

1. China mines over 3 billion tonnes of coal per year – that is x3 when compared to USA
2. 80% of China’s electricity comes from coal-fired power plants
3. Burning coal is the biggest cause of air pollution.
4. By 2030 China is likely to consume 4.4 billion tonnes of coal.
5. From 2005 – 2030 – Carbon emissions are expected to increase from 6.8bn – 15bn tonnes

India also uses significant amounts of coal – 70% of its electricity comes form coal. It has 5th largest coal reserves globally but cannot extract it quick enough to satisfy the demand. However its emissions will increase by 250% by 2030.

In the emerging Asian economies the drive for more coal-fired power continues to steam ahead. Unfortunately alternative forms of energy don’t offer affordable electricity on a large enough scale to satisfy the Asian economies insatiable demand for energy. Natural gas which emits less carbon could be an option, but it will not take over from coal. Look out for those negative externalities – see graph below from Tutor2u.net.

Grant Cleland in this month’s “Parliamentary Economic Review”, looked at storage levels of hydro lakes in New Zealand and how much the New Zealand consumer was being charged. Hydroelectric power accounts for 11% of the total primary usage in New Zealand with imported oil and oil products making up 70% of the primary energy. Hydroelectric power accounts for 57% of the total electricity generation in New Zealand

In early February 2,521 Gigawatt hours (GWh) of water was stored in New Zealand’s lakes – normally around this time of year 3,100 – 3,200 GWh is available. This reduction in supply has pushed up the spot price of electricity from approximately 2.5 cents per Kilowatt hour (c/KWh) last year to 11.7 cents earlier this month.

It is interesting to look at the close correlation between lake levels and electricity prices in the graph below. Notice as lake levels are higher than what is normal for the time of year the spot price drops and vice-versa.

The National government plans to partially sell some state assets, including power companies that could free up to $10 billion. However, analysts have indicated that this could lead to higher prices for consumers and put control of these assets in foreign hands. The power companies involved are Mighty River Power, Meridian and Genesis – and coal company Solid Energy. Also the Government want to reduce its shareholding in Air New Zealand from 76 per cent to 51. In response to this Prime Minister John Key stated that prices went up 72% when the Government owned 100% of the assets.

I have been doing exchange rates with my AS class and we talked about the problems some countries have when they are blessed with natural resources – the resource curse. Africa may have enormous natural reserves of oil, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from oil. This refers to the fact that once countries start to export oil their exchange rate – sometimes know as a petrocurrency – appreciates making other exports uncompetitive and imports cheaper. At the same time there is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. Take for instance Gabon which produces 300,000 barrels/day but although the vast majority of the country is covered in a tropical rainforest it is hard to find bananas that are grown there – most are imported from the Cameroon. In a book entitled “Untapped: The Scramble for Africa’s Oil” John Ghazvinian states that over $20bn has been spent on exploration and production of oil since 1990. This figure is estimated to climb to $50bn by the end of 2010, the largest investment in the continent’s history. Click here for a very good review of the book.

Economists also refer to this as the Dutch Disease which makes reference to Holland and the discovery of vast quantities of natural gas during the 1960s in that country’s portion of the North Sea. The subsequent years saw the Dutch manufacturing sector decline as the gas industry developed. The major problem with the reliance on oil is that if the natural resource begins to run out or if there is a downturn in prices, once competitive manufacturing industries find it extremely difficult to return to an environment of profitability.

Norwegian Model
Norway, the world’s third largest oil exporter behind Saudi Arabia and Russia, puts away a large share of its wealth in a national pension fund, now worth more than $300 billion. The problem here is that Norway is a small, homogeneous country of about five million people that was relatively advanced when its oil started to flow. It already had the sorts of public institutions that enabled it to cautiously manage its newly found wealth. Countries like Chad where 80% of its citizens living below the poverty line and Nigeria with hundreds of distinct ethnic groups living
in civil unrest, would not be able to adopt to the Norwegian model. The situation in other African oil-producing countries is just as difficult. Equatorial Guinea is a family business camouflaged as a country and is seen as one of the most closed societies on earth. Look at the two graphs below – Nigeria and Norway have similar oil revenues but this is very different when you look at the GDP/Capita. In Nigeria it is thought that as much as two-thirds of all economic activity takes place in the informal sector

Since records began the US has been the world’s biggest energy user. The bulk of China’s energy demand comes from industry and infrastructure, but individual consumption is also rising, albeit from a low base. The worrying aspect of this is that it will have to consume a lot more energy to provide its 1.3bn citizens with a lifestyle comparable to those in the US or Europe. Last year China sold more cars than in the US. “There are contradictory attitudes about China’s rise in international society. On one hand, people want China to boost the global economy. On the other, they hope China will not emit too much greenhouse gas. Decision-makers here have a clear idea that they want to pioneer a new path away from the current dangerous model of development. But it is unprecedented in human history for a nation to deal with this challenge, while coping with a huge population and relatively little land and resources.” The Climate Group. The graphic below comes from the Guardian Newspaper.

Even though rich in mineral and energy resources, Bolivia is one of the poorest and least developed countries in Latin America. The country has the second-largest reserves of natural gas in South America, but there have been long-running tensions over the exploitation and export of the resource. Indigenous groups say the country should not relinquish control of the reserves, which they see as Bolivia’s sole remaining natural resource.

However one natural resource which is seen as the permanent reserve of Bolivia is lithium. The Salar de Uyuni, a vast salt flat in southwestern Bolivia, contains at least 5.4 million tons—almost half the world’s known supply of lithium, and has significant quantities of boron and potassium also. With the proliferation of cell phones and laptop computers; lithium is ideal for making lightweight batteries. Now, with the emergence of electric cars, lithium could challenge petroleum as the dominant fuel of the future. Major auto companies, including Toyota, Nissan, Mitsubishi, GM, and Ford, plan to introduce electric and/or improved hybrid models in the next two years. President Obama has pledged to put 1 million electric and hybrid cars on U.S. roads by 2015. Meanwhile, by the end of 2011 China has insinuated that it will have the capacity to build half a million hybrid and plug-in vehicles per annum.